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The “Bank of Mum and Dad” has become one of the top lenders in the country.
How can you help, and what do you need to think about?
As parents are increasingly being asked to provide financial help to their offspring, what are some of the questions you should be asking yourself when approaching this most delicate of subjects?
Can you afford it?
Do you have your own financial plan that will help you decide how much and when you can afford to give? If you have more than one child, what precedent are you setting for the future and at what potential cost?
What’s it for?
Do you give them a cash amount and trust them to decide how to use it or do you make sure that it is used for a specific purpose such as a house purchase or student debt repayment?
Who has received it?
If your child is unmarried and purchasing a property with a friend or partner then it is worth formalising the arrangement. A cohabitation agreement otherwise known as a Living Together Agreement (LTA) is a good way to discuss and record any third-party contributions made towards the property purchase and how it will be dealt with in the event of a relationship breakdown.
Would a loan be better than a gift?
To avoid any misunderstandings, there should be a written agreement stating how and when the loan is to be repaid and if interest is to be charged. If repayments aren’t made then what should happen and, in the worst case, can you afford to write off some or all of the loan?
Should you be a guarantor?
You might prefer the option of guaranteeing mortgage payments in the event that your child defaults. The guarantee will probably be required for the life of the loan and will likely impact on your own credit rating. Both parties might consider taking out income protection insurance. You might also consider offering equity in your own home as security.
How about a joint mortgage?
The parent with the highest income could add that income to their child’s and take a joint mortgage. The house would be treated as a second home for the parent and so would not benefit from the usual tax advantages of the principal residence and the mortgage term might extend beyond your planned retirement date.
Do you share in the profits?
Have a clear understanding as to whether you would share in any profit on an eventual sale of the asset that you have helped to finance.
What are the inheritance tax implications?
Your estate may be liable for Inheritance Tax on the amount given if you die within 7 years of making the gift.
Do you need to make or change your will?
All parties to these types of transactions (both parents and children) should have an up to date Will that sets out how the assets and liabilities created by these transactions should be handled in the event of their deaths.
Taking professional advice
Don’t forget that family and finance can be an explosive combination so think seriously about taking professional financial and/or legal advice. Be open and honest with each other and think everything through thoroughly. Be very clear on what has been agreed, make sure it is understood by everyone, well documented and securely stored.
As a mortgage is secured against your home, it could be repossessed if you do not keep up the mortgage repayments.
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